All posts tagged gas prices

Every year we hear the same thing. More US drilling will result in more oil production, driving down prices. And, every year, massive ongoing drilling efforts fail to deliver these promises. Instead, though US oil production increases at significant costs to US land, environments, and increasing damage via CO2 pollution, prices have remained at historically high levels.

Why?

Unfortunately, the answer to this particular question is a complex one. But the gist of the problem can be summed up in one simple phrase. The oil, and its related fossil fuels, are depleting, dirty and harmful to the environment, and they are geo-politically dangerous.

Depleting…

In the early 2000s, when oil prices were around 20-30 dollars per barrel, about 5,000 wells were drilled in the US each year. US daily oil production was around 6.5 million barrels per day and the cost of producing a marginal barrel of oil was around $15 per barrel.

Today, more than 20,000 wells are drilled each year. The amount of oil produced per well is much, much lower. And many of these new, rapidly drying, wells must be repeatedly fracked to get at hard to reach and diffuse underground deposits. The cost of producing a marginal barrel is around $75 to $80 dollars and the price of oil itself ranges from 80-120 dollars per barrel on the world market.

The US, for all its massive drilling and investment efforts, now produces a little more than 7.2 million barrels of crude oil each day. To just keep that number flat, it will have to increase the number of wells drilled each year even beyond the current 20,000. To increase oil supplies, US drilling efforts will likely more than double. More and more drilling for harder and harder to reach pockets of oil means continued upward pressure on prices. In all likelihood, the cost of a marginal barrel will continue to rise or, at least, remain at a level high as new technology fights an ongoing battle against depletion.

Depletion has also delivered a high volume of low-grade oil that is difficult to refine into gasoline. The issue is that every bit of oil that can be found is being sucked from the ground, regardless of quality. As a result, easy to refine oils are now scarce. So depletion creates a second price pressure as refiners scramble to acquire the means to turn low-quality oil into high-grade gasoline.

In the face of depletion, demand is still rising. China, India, and the Middle East consume more and more oil each year. Though the US and Europe continue to increase efficiency, demand growth from emerging economies more than makes up for any efficiency gain. Currently, more than 80 million new gasoline-powered vehicles are produced each year. This production creates an un-meetable demand for a depleting commodity.

During October and November of 2012, world oil demand reached an all-time high around 90.1 million barrels per day. But world oil supply lagged about 800,000 barrels per day behind this number. This kind of situation, which has become common-place since the mid-2000s, shows that boasts by the world oil industry of being able to meet demand via fracking and other new avenues are mostly hollow. Fracking, instead, is an irrational scramble to supply markets by any means necessary.

In addition, though oil production in the US comes at a very high cost, production in other countries is even costlier. Russia and Saudi Arabia both boast marginal production costs above $90 dollars per barrel. And drilling in both countries has been a frantic effort to slightly increase production. The risk for these countries is that large drilling efforts eventually fail and major oil fields go into rapid decline. Such events would wipe out many of the supply gains achieved via fracking. And, as time goes by, the risk of another super-giant field collapse increases.

Dirty and harmful to the environment…

With climate change producing increasingly severe weather and resulting in very rapid sea ice melt in the Arctic, oil producers face a growing number of strengthening protest movements. 350.org, a movement dedicated to returning world CO2 levels to a ‘safe range’ under 350 ppm, spear headed pipeline protests that have stranded oil supply within the US.This stranded supply pushed US oil and gasoline prices lower even as it resulted in higher world oil prices. In addition, protest movements are pushing divestment from fossil fuel companies.

Broad protest action against fossil fuel companies is the direct result of a failure to transition to more sustainable energy: wind, solar, and vehicle to grid technology. Now, the oil companies face disruption via political and non-violent action that will also likely have a deleterious effect on their efforts to expand production. The result is that increasing damage and disruption due to climate change and related protest movements are also likely to keep oil and related gasoline prices high.

Geo-politically dangerous…

Much of the world’s oil production occurs in geo-politically unstable regions. Saudi Arabia, Nigeria, Iraq and Iran account for more than 20% of world oil supply. Mexico and Russia account for 15%. Political turmoil and supply chain disruptions consistently impact these regions.

Geo-climate also now impacts major oil producing regions. The Gulf of Mexico falls under the gun from intensifying hurricanes, the US northeastern refineries have also been consistently impacted by major storms such as Irene and Sandy. The Bakken fields of North Dakota and Canada are under the gun for powerful direct wind-line storms should ice melt from Greenland continue to intensify. Arctic drilling efforts are also likely to be hampered by powerful storms and erratic weather in those regions.

The time for transition is now…

In fact it was yesterday. But since we didn’t transition away from oil yesterday, today will have to suffice. As mentioned above, oil is dirty, dangerous and depleting. It is a substance that involves severe and increasing risks for price shocks and even worse risks to the climate. Assurances that prices will substantially fall or that climate change risks will not emerge are imprudent at best and madly irresponsible at worst.

Therefore, oil should be considered something we must wean ourselves off of as rapidly as possible. Everything else is just pandering to a false hope.

In the end, massive efforts to exploit depleting and increasingly diffuse and hard to reach oil supplies are unlikely to succeed in long-term reductions in gasoline prices. In fact, such production faces a growing list of political risks and challenges. Further, such production is likely to fall under increasing threat from a less stable climate, both through the impact of storms on production and refining infrastructure and through a growing response by protest actions.

As the presidential election’s silly season continues, as the most outrageously pandering promises are made to all people across the political spectrum, a single issue seems to have outdistanced the rest — who is to blame for high gas prices?

Republicans, for their part, seem to enjoy blaming Obama who, supposedly, is keeping millions of magical drilling rigs hostage. If only freed from their bondage, republicans claim these rigs all alone, all by themselves, could, in a puff of faerie dust, reduce the price of gasoline to $2.50 per gallon.

But do the republicans have a rational leg to stand on in their endless drill, baby, drill diatribe? To find out, we’ll have to examine some facts.

Obama brings massive increase in drilling

Since Obama entered office, there has been a massive increase in US drilling. And the sad truth, despite republican rhetoric, is that the US would be engaged in increased drilling regardless of who held the office of president. The US is so addicted to oil that it can’t afford, at this time, not to exploit every economic source. As a result, drilling has increased by over 350% under Obama.

Huge drilling efforts result in only moderate supply increases

Considering tripling US extraction efforts, one would think that US oil production would rise dramatically. In truth, production has risen, but by only a small amount. The net result of a massive 350% increase in drilling has only been a moderate bump in oil production of 14%. US crude oil production increased from a 2008 level of about 5 million barrels per day to today’s level of 5.7 million barrels per day.

Moderate increase in supply does not result in oil price drops

So all out drilling under Obama has resulted in some increase in supply. And you would think, all things being equal, that the price of oil would also fall. But all things are not equal. Oil is traded on the world market and there are an expanding number of factors keeping the price of oil high.

First, Saudi Arabia has claimed that $100 per barrel is a ‘fair’ price for oil. Saudi Arabia produces more than 10 million barrels each day and is the world’s second largest oil exporter. They are the only country in the world left with substantial spare capacity. This means that Saudi Arabia is the only oil producer with much influence on supply or price. But Saudi is saying it will defend $100 oil. And the means Saudi has to defend this price is through cutting supply. So should oil prices decrease, Saudi will cut production. In fact, it did this during 2009-2010. And since Saudi cut production at that time, prices have risen from $40 per barrel to over $105 per barrel now. As the world economy recovered in 2010-2011, Saudi Arabia brought production back. But demand was so high that the new oil didn’t result in substantially reduced prices.

Second, the reason Saudi Arabia is the only producer with spare capacity is the fact that all other oil producers are pumping oil flat out. And despite this all-out production, the world’s supply of crude oil has remained flat at around 74-75 million barrels per day (blue line on graph) since 2004. This means that despite the highest average price for oil ever, for eight years running, world crude oil production has structurally leveled off. The reason for this plateau is that new production of crude oil is only enough to keep pace with the rate of production decline from existing wells. In short, when it comes to crude oil production, the world is running to stand still.

Third, high cost unconventional oil fills in the gap. Today, the world produces 18 million barrels per day of unconventional oil along with other substances such as wet gas and condensate (condensate is usually included in the crude oil figure, but it’s a different substance altogether). This includes supplies of tar sands from Canada, deep water oil, natural gas liquids, and biofuels. Much of this oil costs $50 dollars per barrel or more to produce. And the fact that the world is reliant on this ‘oil’ means prices will never fall below the high cost of a marginal barrel.

Most unconventional oil isn’t really oil at all. For example, Canada uses 8% of its entire natural gas supply to hydrogenate tar and ship it to us as ‘oil.’ The fact that we are calling hydrogenated tar ‘oil’ is a certain sign of how desperate we’ve become. And biofuels certainly aren’t oil. They’re fuels interchangeable with oil derived from crops. And it is through the production of these very expensive and difficult to produce fuels that the world has been able to increase production at all.

Fourth, the nominal demand for oil is about 98 million barrels per day, this is ten million barrels per day higher than the combined total production of crude oil plus unconventional oil. What this means is if prices go down, demand will keep going up until we hit a level of consumption of around 98 million barrels per day. The reason for this very high nominal demand is the fact that so many machines using so much oil are operating around the world. Oil-consuming automobiles alone are being produced at a rate of 80 million each year with more than one billion of these machines in existence around the world. With so many hungry machines, any new oil produced will be rapidly snatched up.

These combined issues mean that the US would have to produce more than ten million barrels per day of additional low-cost oil in order to create a situation where long-term gas prices of $2.50 cents per gallon or less were possible. But, in truth, achieving this feat is a bald impossibility.

All new oil is expensive oil

The reason why drilling cannot dramatically bring down the price of gasoline is that the cost of producing all the new oil is dramatically high. ‘Conventional’ oil from fracked wells costs $50 per barrel just to produce. Prices for biofuels, deep water drilling, polar drilling and Canada’s hydrogenated tar are about the same. But even the most wildly optimistic projections from all these sources show only slow increases in production requiring massive expense and effort.

Options for drastically increasing production do exist, however, if you’re willing to pay much more for gas. Oil shale contains 1.5 trillion barrels of potentially recoverable goop called kerogen. The US kerogen, however, is even less energy-dense than Canada’s tar. So the cost of producing this ‘oil’ is around $100 per barrel. And this cost hides the fact that a huge amount of natural gas would be needed to hydrogenate the kerogen. Furthermore, the oil shale is in a water poor region. Massive volumes of water would be needed to produce this goop. But the water doesn’t exist in the high volumes needed, so it would have to be piped in.

The result is that a immense and terrifying industrial effort would be needed to rip an enormous hole in America’s heartland to produce this ‘oil.’ And the irony is that, if we are forced to produce the oil shale, it will only result in even higher prices than today.

New drilling can’t dramatically lower prices, even though that’s what oil companies want you to believe

So, in short, the republicans are either misinformed, or they’re not telling the truth. This is hardly surprising considering that oil companies paid 18.5 million dollars into republican campaigns this year alone. Money to democrats from oil companies was substantially lower — only 2 million dollars. And what this oil company money is going to is keeping us all dependent on increasingly expensive oil.

Oil companies don’t want us to realize that even more drilling can’t radically reduce prices. But they do want to continue their dominance in the energy markets. They do want to continue their position as the dominant provider of transportation fuels. And in order to do this, they must convince us that the best solution to high gas prices is more drilling, even if it is not.

Real solutions — increased efficiency, alternatives

The only real solution to the oil depletion problem is switching away from fossil fuels and dramatically increasing efficiency. And even though republicans aren’t very good at proposing sustainable solutions, they are very good at demonizing policies and technologies that actually help.

This was recently demonstrated by republican efforts to demonize the Chevy Volt. Number 1 in customer satisfaction in 2011, the Volt dramatically reduces dependence on oil by making commutes all-electric. Since 80% of all gasoline consumption occurs in commutes, a transition to electric vehicles like the Volt would drop US oil consumption by 7 million barrels per day. If these vehicles became common-place around the world, oil consumption could fall by as much as 35 million barrels per day. And that would dramatically lower oil prices as well as eliminate the need for new oil production. This powerful new technology represents a potential future oil companies and republicans most definitely do not want. A future, however, that would be dramatically more prosperous for the rest of us.

But republican attacks aren’t limited to demonizing revolutionary American technologies like the Volt. Republicans have also worked to de-fund all government incentives to produce solar energy, wind energy, and to increase vehicle efficiency. Solar and wind energy reduce dependence on fossil fuels and since gas and coal are increasingly interchangeable with oil, they indirectly reduce oil prices. Finally, republicans attacks on energy efficiency directly increase the price of oil by increasing demand.

Republican policies push high prices higher

Only a dummy or someone bought and paid for would make the argument that civilization should remain dependent on an increasingly expensive and scarce resource like oil. And that’s just what republicans are doing. Though republicans aren’t to blame for the fact that oil itself is more expensive because it is depleting, they are to blame for pushing policies that enforce dependence on oil, for fighting at every turn to reduce efficiencies, and for doing their best to demonize and destroy any alternatives to oil.

Foremost, the republican push for drilling as the only solution is doomed to failure. At best, new drilling is a temporary stop-gap. Long term, without alternatives, it dooms the world economy to spiraling increases in energy prices. This policy is one born out of the myopic special interests of oil companies and their continued drive for dominance and outrageous profits. A true allegory to this failed policy was the conservative/republican push for deregulating the banks and the housing market in the 1990s. The result was a world financial collapse in 2008. We don’t want to see the same thing happen in energy. But blinded by profits and donations, republicans are,once more, trying to force us down a dangerous path.

Over the past few weeks, politicians have made much hay over high gas prices. Republicans blamed Obama. Obama fired back. And much misinformation flew back and forth. The sad truth is that there are a number of hard realities keeping prices high and the only viable solution is weaning ourselves off of oil over time.

Truth #1 Conventional Crude Oil Peaked in 2004

In 2004, production of the stuff we all think of as oil peaked. It topped off at around 70 million barrels per day. And since that time, no matter how much prices increased, conventional crude oil would not significantly exceed 70 million barrels per day. It is a sad fact that the world has struggled to increase crude oil production and failed. $100 oil is proof enough of that.

Truth #2 Increases in Production Have Come From Fuels That Aren’t Oil

There are many fuels called oil that really aren’t. They include: condensate, natural gas liquids, tar sands oil, oil shale, and bio-fuels. Condensate is a product of gases turned to liquids during the refining process. Natural gas liquids are condensed from wet gasses. Tar sands and oil shales are low energy fuels that have been enriched through a process called hydrogenation. And bio-fuels are liquid fuels interchangeable with oil but produced from crops.

The total production of all these fuels is now more than 18 million barrels per day. All are less energy dense than traditional oil. Most of them cost more to produce. In short, these fuels are simply less economical. This lack of economy makes them more costly, harder to access, and less useful. For example, tar sands cost between 50-60 dollars per barrel to produce. And this increased cost pushes up the overall cost of oil by setting a bottom on prices equal to the cost of the most expensive fuel produced. The reason these new fuels put a bottom on prices is that this marginal oil won’t be produced for very long if prices fall below the cost of production.

Of these 18 million barrels of non-oil, 2.5 million barrels come from tar sands and 2 million barrels come from bio-fuels that require oil to remain in a price range of 50 dollars per barrel or more. These high costs, in turn, push up the price of oil.

Truth #3 Depletion is Increasing the Cost of Crude Production

Returning to conventional crude, it’s important to note that the cost of production is rising for it as well. The reason is that most of the new crude comes from special wells that require enhanced oil extraction techniques. One example of enhanced extraction is oil fracking. Fracking breaks rock in order to liberate both oil and gas. And the fracturing techniques require more expensive machinery, chemicals and water which increases the cost of production. With oil fracturing, the price of oil needs to also stay above about 50 dollars per barrel. New oil derived from fracking represents about 1.5 million barrels per day. So this flow of oil is also putting a bottom on prices.

Truth #4 World Oil Exports are Declining

As oil exporting countries make economic gains by selling their costly product, economic activity along with oil consumption in-country increases. This results in net losses in the amount of oil available for export. Among top oil exporters Venezuela, Saudi Arabia, Egypt, Mexico, and Norway, exports are going down. Other countries who were once exporters, including the UK and Indonesia, have now turned into net oil importers. Reduced flows of exports means less oil is sloshing around in a world full of buyers. So demand, long-term, is increasing while supply, long-term, is going down.

Truth #5 Speculators Matter

Recent estimates from economists indicate that speculators have pushed up oil prices enough to increase the cost of gasoline by 50 cents per gallon. Speculators trade in paper barrels of oil and manipulate floating stocks to increase costs and profit at the margin. That said, unless oil markets were tight, speculators wouldn’t have this ‘opportunity.’ Oil scarcity and fear keep the speculators preying on high prices by making the cost of oil and, therefore, gas even higher.

Truth #6 Current High Prices are Supported By Fear

Recent fears that Iran will mine the Persian Gulf and use military force in an attempt to close the Straights of Hormuz have helped to keep oil prices above $105 per barrel in the US. Currently, fear is probably pushing the price of oil up by about ten or fifteen dollars per barrel. Likely, without such a geopolitical constraint on oil, prices would fall to the low 90s as 100+ dollar per barrel oil has caused demand destruction in various markets worldwide over the past year.

Truth #7: 80 million New Cars are Produced Each Year

There are more than one billion automobiles in this world. And each year one is produced for every person born. These vehicles require energy to operate and the vast majority of them require oil. This reality places a very high demand on depleting oil. The only way to curtail this demand and still rely on oil is to, at times of scarcity and high price, reduce the amount of driving. The result in this reduction is a curtailment in economic activity resulting in slower growth or recession. So you have tightening, more difficult to access supply pushing directly against rapidly increasing demand in the form of a broad swath of new vehicles and machines produced each year.

Prognosis: Without Alternatives, Increased Efficiency Oil Prices Will Keep Rising Long Term

The combined realities of a plateau in conventional crude oil, the increased cost of producing new oil, rapid depletion in existing oil fields, and the contentious geopolitics of oil mean that over the long-term oil prices will continue to rise or remain high. The only way out of this depletion price trap is to drastically increase efficiency and to shift vehicle, machine, and industrial systems to fuels that are not depleting, preferably alternative fuels and renewable energy. These changes require long-term efforts and large investments. The alternative pushed by political forces aligned with the oil industry — relying only on increased drilling — is a short-term fix that will only more rapidly deplete the remaining, meager and difficult to access stores of oil.